Electronic Clearing System - ECS

Electronic Clearing System (ECS) is an electronic method of fund transfer from one bank account to another. It is generally used for bulk transfers performed by institutions for making payments like dividend, interest, salary, pension, etc. ECS can also be used to pay bills and other charges such as payments to utility companies such as telephone, electricity, water, or for making equated monthly instalments payments on loans as well as SIP investments. In this article, we look at the working process of ECS in detail.

Types of ECS

ECS can be used for both ECS credit and ECS debit.

ECS Credit

ECS credit is used for allowing credit to a large number of beneficiaries by raising a single debit to the customer’s account, such as dividend, interest or salary payment.

Advantages

The benefits of ECS credit given to the clients are as follows:

The end beneficiary need not make frequent visit to his bank for depositing the physical paper instruments.
Delay in the realisation of proceeds, which used to happen in the receipt of the paper instrument, is eliminated.
The ECS user helps to save on administrative machinery for printing, dispatch and reconciliation.
Provides the ability to make payment and ensure that the beneficiaries account gets credited on a designated date.

Working of ECS Credit System

ECS payments can be performed by any institution (ECS user) that has to make bulk or repetitive payments to a number of recipients or beneficiaries. They initiate the transactions after registering themselves with an approved clearinghouse. ECS users also have to obtain a consent such as the account particulars of the beneficiaries for engaging in the ECS clearings. Under the scheme, the beneficiaries of the repetitive or regular payments can also require the paying institution to make ECS (credit) for payment. The ECS users expect to effect payments and to present the data in a prescribed format to any one of the recognised clearinghouses. The clearinghouse will debit the account of the ECS user through the user's bank on a particular day and credit the accounts of the recipient banks, for providing onward credit to the accounts of the ultimate beneficiaries.

ECS Debit

ECS debit is used for raising debits to a number of accounts of consumers or account holders for affording a single credit to a particular institution, in cases such as utility payments like electricity bills and telephone bills.

Advantages to Clients

The benefits of ECS debit given to the clients are as follows:

Trouble-free: Eliminates the need to go to the collection centres or banks and the need to stand in long queues for payment.
Easy to track: Customers are not required to track down payments by last dates. The ECS users would monitor the debts. The ECS user saves on administrative machinery for collecting the cheques by monitoring their realisation and reconciliation.
Better cash management: Chances of frauds due to fraudulent access to paper instruments and encashment are avoided.
The realisation of payments on a single date is enabled instead of fractured receipt of payments.

Working of ECS Debit System

ECS debit is a scheme in which an account holder can authorise an ECS user to recover a prescribed amount by raising a debit on his account. The ECS user has to receive an authorisation which is called ECS mandate for raising such debts. These mandates have to be approved by the bank branch maintaining the account. Any ECS user participating in the scheme has to register with an approved clearinghouse, an ECS user should receive the mandate forms from the participating destination account holders with the bank’s acknowledgement. A certified copy of the mandate should be available with the drawee bank. The ECS user has to submit the data in a specified form through the sponsor bank to the clearinghouse. The clearinghouse would pass on the debit to the destination account holder through the clearing system and credit the sponsor bank’s account for onward crediting the ECS user. All the unprocessed debits have to be returned to the sponsor bank’s account for onward crediting the ECS user. All the unprocessed debits have to be returned to the sponsor bank, within the time frame specified. Banks treat the electronic instructions received through the clearing system at par with the physical cheques.

Service Charges

The Reserve Bank of India (RBI) has deregulated the charges to be imposed by sponsor banks from institutions. The destination bank branches have been staying focused on affording ECS credit free of charge to the beneficiary account holders.